Every year around tax time fears are renewed. What if I screw up my taxes? What do I do if the IRS wants to look at my financial records? Will an IRS audit ruin me financially? Will it ruin my business?

A Tax Audit

An audit, in general, is a formal review or analysis of…something. In regards to the Internal Revenue Service (IRS), an audit is an official review or examination of your income and asset-related records associated with a recent tax filing. Large businesses and corporations often come under audit scrutiny for financial recordkeeping.

Contrary to popular belief, the IRS audits only those tax records you’ve filed in the last few years. So, if you made a mistake on a tax return 10 years ago, they will be unable to audit you for that.

What about your tax return could prompt an audit? Imagine the millions of tax returns the IRS is required to comb through annually. Typically, only those that clearly deviate from the norm are subject to review, whether you’re an individual or a business.

What to Expect from an IRS Audit

Unfortunately we hear news stories about millionaires and celebrities who’ve been audited and owe many thousands or even millions of dollars in back taxes. That type of news does little to calm fears of an audit.

In the event the IRS finds something peculiar about your tax records, you can expect the following:

An IRS auditor will contact you through by phone and mail to notify you of the finding.

Some audits are handled through mail or correspondence, while others are face-to-face interviews, often held at a local IRS office. A business audit may be conducted on the premises, where most financial records would be immediately available.

Your personal and financial information should be handled in complete confidentiality—an audit can be embarrassing. You should also be notified of your rights, as they relate to an audit.

Once the review of your records is complete, the auditor may be satisfied that everything is correct and accounted for, or he or she may indicate that there was in fact an error that could cost you in back taxes. You have the right to request a further evaluation with another auditor if you disagree with the initial findings. And in cases where you may owe an exorbitant amount of money, you may even be able to leverage an “offer in compromise.”

Preparing for a Tax Audit

When you receive notification of your audit and the information you’ll need to provide, begin to collect it immediately. Theoretically you should have readily available all the records you used to prepare your taxes. But if anything is missing you can help ensure you have time to account for it, or time to contact the auditor to notify him or her of the missing documentation.

You may have a lawyer or a tax representative help you during your audit process. Many businesses already have tax lawyers available for just such situations. If you’re an individual, you might consult your tax preparer about representation—many of them offer this service.

The best advice: adhere to best-practices for financial record-keeping—it’s the best defense against an audit.

For additional and up-to-date information on IRS audits, visit IRS.gov.